If there was no paper money, says Matthew Yglesias at Slate, then the Fed could slash interest rates below zero, and Americans would have no choice but to spend money or see the value of their savings go down. Guntmar Fritz/CORBIS

December 13, 2011

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"Eliminating paper money could end recessions," says Matthew Yglesias at Slate. For decades, it's been clear that cutting interest rates stimulates the economy by encouraging people to spend rather than save. "But there is a problem with this simple recession-fighting formula. The number zero." The Fed has already slashed interest rates to a record low between 0 and .25 percent. If interest rates go below zero — "in effect a tax on holding cash in the bank" — Americans would pull their cash out of financial institutions "and store it in shoeboxes instead. But what if you couldn't withdraw cash" because there was no cash? Here, an excerpt:

Now we come to the miracle of the cashless society... What if all transactions were electronic, so the only way to avoid keeping money in a negative-rate account was to go out and buy something with the money? Well, then, we would have solved our depression problem. Too much unemployment? Lower interest rates below zero, Americans will start spending and investing again, the economy will grow, and unemployment will go back down to its "natural rate."